3/29/2004 @ 12:00AM

Lord of the Rigs

Wade Thompson has never owned an RV. But he has assembled the world’s biggest RV maker with this strategy: When he buys your company, you better be ready to compete–against him.

When you think recreational vehicles, midtown Manhattan does not come to mind. It does not have the parking, or the right demographics, for 25,000-pound motor homes or 40-foot travel trailers. Yet this is where Wade Thompson, 63, chooses to run Thor Industries, the world’s biggest recreational vehicle manufacturer. He’s got a modest three-room office, decorated with paintings of Airstream trailers, on the sixth floor of an office building near Grand Central Station. Instead of spacious skies and amber waves of grain, Thompson looks out onto tight streets and flickering traffic lights. He’s been an off-site chief executive ever since he bought his first RV maker in 1977, when he rented a one-room apartment with a single light and a black-and-white TV above a pizza parlor in Butler, Ohio (pop. 921) and commuted every week from New York.

Another oddity about Thompson: He doesn’t own an RV. Driving a behemoth on the open roads, with lawn chairs strapped to the back, is not his style. He’d rather zip two hours north to his country home in Niantic, Conn. in his souped-up 2004 Mini Cooper, all 143 inches of it.

Thompson has assembled ten RV companies over the past two decades, propelling Thor to 23% of an $8.5 billion RV market that is soon to explode–thank you, aging baby boomers. But let other dealmakers babble about synergies. Thompson hews to more primal mantras:competition and cash. Yes, he brings economies of scale to his companies. But his acquired companies are surprisingly autonomous. They are run separately by their original managers and compete with Thor’s other divisions. Thompson directs the company from his satellite headquarters, really just he and an assistant. This is not the kind of conglomeration you see at, say, Tyco.

Paychecks are the motivation. The top managers of each of Thor’s divisions share 15% of the division’s pretax profits, with no ceiling on the payouts. Factory workers likewise are often paid for how many RVs they turn out, not at some hourly rate. “I want every one of our company heads to feel like it is their business, in their control,” Thompson says. “If they don’t perform, they don’t get paid very much. If they do, there is no cap to what they can make.”

Last year six managers at Thor companies earned more than Thompson, who took in $1.1 million, according to SEC filings. A few made three times what Thompson did. “I am absolutely delighted if someone earns $5 million in a year at this company,” Thompson says, “because it is based on the results of the operations they are running.”

Indeed. His 31% stake in Thor is worth $515 million. And shareholders have seen a 450% price jump since 1998, compared with an average 170% rise in other public RV company shares. Thor has never had an unprofitable year–a rarity for an RV company–not even during the downturn in the late 1980s (though Thompson took no salary for two years to stay in the black). Over the last five years Thor’s revenue has grown at an average of 18% a year, to $1.6 billion in 2003. Earnings have grown 26% a year, to $79 million last year. And new business appears strong. The company, which is legally based in Jackson Center, Ohio, recently announced a six-month order backlog of $499 million, up 83% from last year.

Now Thompson is expanding further into the big leagues with the manufacture of drivable RVs. These are more complex to build and sell than the lower-end towable RVs, a market that Thor now dominates. In drivable RVs, Thor will run head-on into the powerful 46-year-old firm Winnebago, which gets all its sales from drivable RVs. In a sideswipe at Thor, Bruce Hertzke, Winnebago’s chief executive, says, “We want to be known as having the highest quality and being the most profitable company. If someone wants to buy the market, that’s their business.” Winnebago’s net profit margin of 6% bests Thor’s 5%.

Thor was born in 1980 when Thompson and a friend, Peter Orthwein, persuaded Beatrice Foods to sell them Airstream, which was struggling badly, for $7.5 million, all borrowed from the seller. (“Thor” is a combination of the first two letters of Thompson and Orthwein, not the god of thunder.) It was an awful time for the RV industry. The market had fallen by half in 1979, a year of the gas lines, and by half again in 1980.

The speculators bought at the bottom. Save for a few dips, the RV market has since been climbing, with a 5% gain last year to 289,000 vehicles, according to Statistical Surveys in Grand Rapids, Mich.

It’s going to get more growth, at least if interest rates stay down. Baby boomers are creeping into the RV-buying age. They can now borrow over 15 or 20 years, deducting the interest if the loan is a second-home mortgage. The SUV boom has put into millions of driveways vehicles that can tow huge RVs. Fear of terrorism and foreign diseases and the expensive euro have kept Americans home for vacation.

Sports tailgaters, especially Nascar fans, are coming by the carload to RV dealerships. The fraction of 35-to-44-year-old Americans who own RVs grew to 9.6% in 2001 from 6.9% in 1997, according to a 2001 University of Michigan study. Median income of owners: $56,000. Four in five pull towable RVs behind their cars or pickups. Towables range from tiny pop-up trailers costing as little as $4,000 to 40-foot giants that cost $100,000 and can’t be towed with anything less than a one-ton pickup. One in five RV owners have the drivable kind, called motor homes (see pictures). You can get them with plasma-screen televisions and marble countertops–and you can spend up to $1 million.

Since his childhood in Wellington, New Zealand, Thompson has wanted two things: to live in New York and to be an entrepreneur. The New York fascination started when Thompson was 9 and his parents bought two encyclopedias. He ran across pictures of Manhattan skyscrapers and was rapt. He went to business school at New York University and settled in New York for good in 1967.

He was working in corporate development for a small conglomerate in the late 1970s when he discovered a company with “a very tidy balance sheet” that happened to be an RV maker. He called his friend Orthwein (whom he had met at a business luncheon), and they bought the company. “It was an understandable industry,” Thompson explains. “Even though I knew nothing about RVs, it was a deal that could start me off as an entrepreneur. If I stubbed my toe, I stubbed my toe. My family would go broke, and I’d have to go get another job.”

Three years later he and Orthwein bought Airstream and started Thor. In one year they turned a company losing $12 million pretax into one making $1 million profit. They did not fire any workers, and they improved quality, which reduced warranty costs. And they were lucky with their timing. The industry steadied in 1981 and really started to rebound in 1982.

The RV industry was–and remains–as fragmented as the auto industry had been before the Depression. There are 75 companies selling hundreds of brands. The barriers to entry are low. You buy the complex parts, like chassis, engines and transmissions. You then hire carpenters, plumbers and electricians to build a small house on the chassis. You don’t need a huge factory to do this.

Thomson kept buying RV makers, typically paying five to six times pretax income for outfits with sales between $30 million and $400 million. Bulk buying of parts reduces each division’s material cost (about 60% of the cost of an RV) by up to 4%. “We’re assemblers, but we’re buying basic products off the shelf,” says Thompson. “There are only two refrigerator makers. There are only two stove manufacturers. The key is to distinguish the product by its selling features.”

How best to do that? Keep each division’s sales, manufacturing, and research and development operations separate. By competing with one another, they create and build vehicles with different attributes and character. Armed with distinct brands, Thor can sell more to several dealers in the same market without cannibalizing sales or angering dealers. If a division comes up with a hit, it makes the money. There is no sharing with sister divisions.

If this formula sounds familiar, that is because it’s how General Motors used to do business. It works great–when you own the market. But it’s an expensive way to operate, and if low-cost manufacturing arrives–watch out. Ask GM.

Thompson’s biggest acquisition, the $151 million purchase of Keystone RV completed in 2001, proved Thompson’s concept on a large scale.

Each of Keystone’s 14 brands has its own plants and managers who make the decisions for their brands. “I tell the guys, If you want to make pink units, go right ahead,’” says Executive Vice President William Fenech. “But then you’ll have to sell pink units.’”

It’s the same on the factory floor. Workers in many of Thor’s plants are paid not by the hour, but by how many RVs they get out the door each day. The plants earn a fixed percentage of sales, a labor rate Thor won’t reveal. Each group along the line–plumbing, electrical, cabinetmaking, final finishing–makes a percentage of that pool. It’s up to the workers and each group’s floor leader to weed out slow or sloppy workers, figure out faster ways of doing things or ways to cut head count. If the plumbers, say, learn how to build 25 units a day with one less worker, they get a bigger cut of the pool.

Keystone president Ronald Fenech (Willaims’s brother) says group leaders can make $75,000 a year and line workers can make $50,000. “The more money they make, the better it is for us,” he says, sounding exactly like his boss.

Keystone saved $10 million in purchasing costs in the first year after acquisition. Its growth, instead of being stifled in the larger company, has accelerated. Keystone built 4 new plants last year and will add 2 more this year, for a total of 16. Thor’s back-office organization has helped Keystone boost its once-struggling quality and service operation and spare-parts distribution. “Small companies can turn on a dime. Big companies have great quality and great back-end operations like service,” says Ronald Fenech. “We’ve now got both.”

Keystone is now the country’s biggest maker of towable RVs, with 18.2% of the market last year, up from 16.4% in 2002. It’s not afraid to exercise bragging rights. “We’ve been the best thing at Thor,” claims Keystone founder and now Thor director H. Coleman Davis. “Some of their brands were getting complacent, and we came in and raised the bar.” About a corporate brother with which it competes most directly, Dutchmen Manufacturing, William Fenech says: “We want to win and win big. We want to kill ‘em.”

Dealers say Thor’s company-within-a-company structure makes it responsive to customer wishes. A suddenly popular floor plan or storage compartment, for example, can be added quickly to a design. “They don’t have to go up this giant chain of command to get something done,” says Michael Burnside, an owner of a pair of northern Michigan dealerships, who left a Thor rival, Coachmen, after 17 years.

Of course sometimes the local guy doesn’t have all the answers. Thompson wanted Thor’s Four Winds brand of motor homes to start building big, expensive diesel buses when he saw the market for diesels heat up a few years ago. Four Winds’ president, Jeffery Kime, balked. The segment kept growing, and Kime finally got into the game with a new diesel motor home, a $225,000, 40-foot whale called Mandalay. Kime now sheepishly says he expects diesels will be the fastest-growing part of his business this year.

Thompson does put his foot down when it comes to the finances. He makes all capital expenditure decisions and sends auditors to each division several times a year. Thompson’s favorite tool–one he talks about with singular reverence–is a sheet of paper that he receives from each division every day by 9:30 in the morning. On it are compiled dozens of financial metrics, like cash position, production, orders, head count, and, most important, retail sales and wholesale shipments. At the first hint of an imbalance, he is on the phone. When the Thor California division started to slump last year, Thompson sent Davis to Moreno Valley, Calif. to overhaul the operations well before the division became unprofitable.

Thompson is obsessive about the quality of his balance sheet–Thor is debt free, which allows it to acquire companies when the time is right for Thor, without overleveraging. As a buyer Thompson has earned a reputation for being a tough and patient bargainer. He waited eight years to complete his most recent acquisition, last September’s purchase of Damon, a maker of big motor homes costing $60,000 and up. The $43 million price came to 5.5 times income before interest and taxes. “Damon probably could have gotten a better price,” says Orthwein, who works as Thor’s vice chairman in Greenwich, Conn. and has an $80 million stake. “We’re giving them purchasing power and the resources to fix up plants.”

No argument from Damon’s former owner, Donald Pletcher. “I was at a disadvantage because I wanted to go out a certain way, and Wade was sharp enough to sense that,” Pletcher says. “He was very, very careful not to overpay.” In return Pletcher was able to keep his management running the business–and making at least as much money as before.

With the Damon acquisition Thompson will try to apply his separate-brand concept to big, complicated motor homes. It won’t be so easy. Big motor homes require more engineering-intense parts like wrap-around windshields and driver cockpits that can’t be bought off the shelf. Competitors shave costs and boost margins doing what for Thor would be unthinkable–sharing engineering, development and manufacturing. The deal has forced a shift in the way Thor does business. For the first time Thompson is forcing brand presidents to share some basic information, like how they have learned to improve quality or manufacture cheaply. He also plans to find new ways to cut purchasing costs.

Thompson gets visibly riled when he talks about the spate of recent corporate scandals. He’s long been a shareholders’ rights champion. He and Orthwein have refused to take restricted stock options. He keeps Thor’s headquarters as lean as it was when the company was struggling to keep Airstream rolling. The contact information on Thor’s financial press releases is simply “Wade Thompson and Peter Orthwein,” along with their direct phone numbers. The art on the walls of his office, portraits of Airstream trailers by the painter John Baeder, is all personally owned, he takes care to note.

Thor has no public relations department, and Thompson uses no outside agency. He hired one several years ago; the relationship lasted 60 days. He refuses to use investment bankers. “Peter and I know how to read financial statements,” he sniffs.

Which is what he is doing these days, as always. “There are 75 companies out there, and the top 6 have 70% of the industry,” he says. “That leaves 30% of the industry still out there. We’ve got a couple of prospects on my desk right now.”

Maybe the biggest news about Thor is this: Thompson plans to go out West this summer with Angela, his wife of 37 years, to see the Rockies and the Grand Canyon–in an Airstream.